Friday, 27 September 2013

So how is Nike able to succeed in a challenging global economy?

25 years ago NIKE launched its first ‘Just
Do It’. These are three simple words that remain a rallying cry for people
striving to reach their full potential.

Looking at Q1 results, Nike is off to a
great start. First quarter revenues were up 8%, gross margins grew 120 basis
points better than projected and diluted earnings per share increased 37% to
$0.86.

So
how is Nike able to succeed in a challenging global economy?

By focusing on the fundamentals, the
competitive advantages that help Nike win and expand their leadership position.
Mark Parker, President and CEO provided with three highlights; ability to
innovate, the power of the NIKE Inc portfolio and ability to continue to make
meaningful connections with consumers.

So let's take a look at the first one, ability
to innovate. It's what fuels Nike’s growth and it always starts with the
athletes. How can Nike make the athlete faster, stronger, better and help them
push themselves to new levels of performance.

In Q1 Nike launched a whole array of
products that deliver the promise including the NIKE Free Flyknit, the next
generation of Flyknit products in a running category. This shoe demonstrates
how Nike takes Flyknit and combines it with other footwear platform like Free
in this case to continue to integrate and serve the athletes. As you may have
heard before, Flyknit is high performance, visually iconic and manufactured in
ways that reduce labor and waste.

First quarter revenue for Nike Inc.
increased 8% on both a reported and currency neutral basis as revenue for the
NIKE brand including NIKE Golf and Hurley increased 7% and Converse increased
16%.

NIKE brand future orders accelerated to
10% growth on a currency neutral basis reflecting a 7% increase in units and a
3% increase in average selling price. The increase was led by double-digit
growth in North America and both European geographies. Weaker foreign
currencies reduced reported futures growth to 8%. First quarter diluted EPS
increased 37% to $0.86 driven by revenue growth, gross margin expansion and
leverage of SG&A expenses which were flat for the quarter.

In North America Q1 revenue increased 9%
on both a reported and a constant currency basis, driven by growth across all
key categories except Golf, including double-digit growth in Basketball,
running and men's training. For the quarter footwear revenue increased 9%,
while apparel and equipment grew 9% and 13% respectively.

Q2
Guidance:

For the second quarter, Nike expects to
see gross margin expansion of about 50 basis points driven by continued
benefits from higher average prices, easing raw material costs and growth in
DTC partially offset by higher discounts to clear inventories in Mexico,
start-up costs for expanded U.S. distribution center and stiffening FX
headwinds .

For the fiscal year, they also expect
gross margin expansion of approximately 50 basis points, a modest increase from
prior guidance as the ongoing impact of the upside that drove Q1 results are
expected to more than offset FX headwinds and labor cost inflation. For Q2, Nike
expects SG&A to grow at a mid-teens rate reflecting shifts in demand
creation, phasing and ongoing investments in strategic initiatives. The
management indicated last quarter that there will be more volatility in the
year-over-year comparisons of SG&A due the timing of key sporting events
this year and last.

For the full year, Nike continues to
expect SG&A to grow at a low double-digit rate as they invest in their brands,
DTC and innovation. For FY '14, they continue to expect the effective tax rate
will be about 25%. Q1 was a great start for fiscal 2014 delivering strong
growth in revenue and profitability. Over the balance of the year, management expects
to continue to drive revenue growth and gross margin expansion while making the
investment and demand creation and innovation that will deliver sustainable
profitable growth and consistent value to their shareholders in the future.